Land and Real Estate have always been considered to be the safety area of investment. Real estate values are always on the rise due to India's increasing population coupled with decreasing land availability. However the current reality lies in the fact that the majority of the population who aren't High Network Individuals have only been able to invest in low-return properties. Thus, those seeking to join the investor bandwagon have not been able to realize the true purpose and value of investing in real estate.
For a long time average citizens have been looking to invest their hard earned money in avenues which ensures better cash flow instead. Until a few years back commercial real estate was considered an impractical avenue of investment due to the requirement of connections, comprehensive knowledge of the real estate market and its high-ticket price. Fractional Ownership of commercial real estate has emerged as a feasible avenue of investment which provides regular returns as well as long-term appreciation of capital.
What is Fractional Ownership?
Fractional ownership has emerged as the saving grace for average citizens seeking to circumvent the financial barriers of making profitable investments in commercial real estate. Contrary to 'ownership' of property which by definition means sole ownership of property, the concept of fractional ownership refers to 'shared ownership' where an investor owns only a fraction of the property. In other words, funds are pooled in from multitude of investors and each investor gets fractional ownership of the property.
However, the property registration does not happen in the name of any investor. Instead, a Special Purpose Vehicle (SPV) will be created consisting of all the investors and the registration will be made in the name of the SPV. The investors will own equity shares and debentures in the SPV which are in proportion to their investment.
All benefits from the investment such as the share of generated rental income (8% to 10% approx) and appreciation of the price of the property (5% approx. per annum for a minimum period of 4-5 years) will also be shared by each investor.
With fractional ownership, High-yield Grade-A commercial assets which generate much better returns can now become accessible to the small investors who are looking to invest in avenues other than traditional residential and commercial properties. Normally, investments start from Rs. 25 Lakhs in fractional ownership assets.
Fractional Ownership vs. REITS
Real Estate Investment Trusts (REITS) are like mutual funds while Fractional Ownership is like direct investment in stocks. In other words, REITs collect funds from investors and invest them in income generating properties which differs from Fractional Ownership in the following ways:
| Fractional Ownership | REITs | |
|---|---|---|
| Access & Transparency | Complete freedom to choose the asset an investors wants to invest in. | No freedom of choice regarding selection of asset. |
| Diversification | An investor can make the choice to invest across multiple assets over different times, locations and needs. | An investor has to invest in one entire portfolio that has a set number of assets. |
| Property Type | Even upcoming assets or assets under construction can be in invested in. | At least 80% of the assets should be completed and must be revenue-generating properties. |
| Investment Constraints | It is self-regulated, enabling expansion of the investment structures for investor requirements from balanced to income-generating assets. | A highly regulated trust fund which limits the expansion of innovative growth models. |
| Asset Requirement | No minimum value that a property has to meet. Instead, the property is selected post rigorous due diligence and after ascertaining the returns. | A minimum asset requirement of INR 500 Cr makes REIT's offerings limited with regard to the number of properties that it can undertake. |
| Division of Funds | A continuous pipeline of prime properties is offered giving multiple options to investors to invest. | It can invest in at least 2 projects with not more than 60% of the value of assets invested in one project. |
| Cash Flow Distribution | A complete distribution of distributable cash flows, which is calculated post deducting statutory fees and taxes along with the asset management fees | Must distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to its investors |
| Valuation Intervals | Continuous monitoring of valuation of properties through data analytics. | Full valuation to be carried out at least once a year and half-yearly updates to the same have to be carried out. |
The Bottom Line
After the pandemic shook economies across the world, the future of traditional avenues of real estate investment has become uncertain as they are affected by changes in economic conditions. As it stands, fractional investment in CRE is a highly promising opportunity to build on your investment portfolio, generate wealth and induce passive income. While most average people are new to the concept, upcoming start-ups and tech-enabled platforms have taken up the mantle to make the process seamless and free of hassle.
